PGP 22-24

Strategic Management - II
 Strategic
Management II

(Module 2)

International
Strategy
Competing Globally
 International Business

 Context

National borders

Government policies

Availability of factors of production

Cultural norms
5
 Competing Globally
Key Questions
Why?
Where?
When?
What to do...? / How?
Cases
United Cereal
6

Amore Pacific
WHY IB?
To create
& capture
more value

7
Market – growth/profit
Resources – cost
Knowledge/learning
Social – hubris?
Political – power?

8
 BUT WHAT IS THE REASON FOR THIS

Operating Margins for Publicly Traded Firms

in the United States, 1990–2011
 Competing Globally
 Challenges
Liability of being a foreigner
Additional costs – policy, distances, cultures,
coordination
Paradox of being consistent
Processes followed in home turf not valid abroad –
Organization : Environment (Mis)Fit
Hijack of technology, knowledge, idea
Results in negative premium (discount) in financial
10

(share) markets
 Competing Globally – Specifics of execution

 What to do where? - Location decision factors

Location Characteristics

Institutional environment

Existence of Cluster

Natural endowments

Country v/s site characteristics

11
 Competing Globally – Specifics of execution

 What to do where? - Location decision factors

Government Incentives

Incentive types

Firm’s bargaining power

Government willingness to allow

foreign investment

12
 Competing Globally – Specifics of execution

 What to do where? - Location decision factors

Firm Fit

Similar to home country

Distance

Fit with firm capability

Complementarity with existing location

Fit with business model 13

 Competing Globally – Specifics of execution

 What to do where? - Location decision factors

Competitive Effect

Competition for inputs

Cluster impact (+ & -)

Product competition

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 Competing Globally – Specifics of execution

 What to do where? - Internal, External and Dynamic

Links

Offshoring – Tesla in China, Nike in India

Outsourcing – Fiat engine in Maruti diesel models

Offshore Outsourcing – iPhones

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 Determinants of Time of Entry - CLIF

L I

C
 Competing Globally – Specifics of execution

 When to do what? – Factors affecting Timing of

Entry

Competitive Clock

Benefits of early entry

Opportunity cost of postponing

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 Competing Globally – Specifics of execution

 When to do what? – Factors affecting Timing of

Entry

Location Clock

Comparison with other locations

Maturity

Changing conditions

Foreign presence
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 Competing Globally – Specifics of execution

 When to do what? – Factors affecting Timing of

Entry

Incentives Clock

Decreasing generosity incl

reversal (Dabhol)

Short v/s long term incentives

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 Competing Globally – Specifics of execution

 When to do what? – Factors affecting Timing of

Entry

Firm Clock

Slack resources

Intrinsic pace to deploy business

model

Experience
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Internationalisation
drivers
Locational advantage: Porter’s Diamond

Porter’s Diamond – Why some locations tend to produce

firms with competitive advantages in some industries
more than others.(Silicon Valley, Detroit, London)
The four drivers in Porter’s Diamond arise from:
 local factor conditions;
 local demand conditions;
 local related and supporting industries;
 local firm strategy, industry structure and rivalry.
 Porter’s Diamond – the determinants of national
advantages

Source: Adapted with permission of The Free Press, a Division of Simon & Schuster, Inc., from The Competitive Advantage of Nations by Michael E. Porter.
Copyright © 1990, 1998 by Michael E. Porter. All rights reserved.
 Global sourcing
Global sourcing refers to purchasing services and
components from the most appropriate suppliers
around the world, regardless of their location.
The advantages include:
 Cost advantages: e.g. labour costs,
transportation and communications costs, taxation
and investment incentives.
 Unique local capabilities: e.g. centres of
excellence in R&D clusters globally.
 National market characteristics and national
reputation for a particular product.
 Locational advantages
Locational advantages can be due to:
• Cost advantages including labour costs,
transportation and communications costs and
taxation and investment incentives e.g.
employing software engineers in India.
• Unique local capabilities. European pharma
firms locating in Boston and California to tap
into local research expertise.
• National market characteristics.
Differentiated product offerings aimed at
different market segments e.g. Gibson guitars.
The global–local dilemma

The global–local dilemma relates to the

extent to which products and services may
be standardised across national boundaries
or need to be adapted to meet the
requirements of specific national markets.
International strategies
Four international strategies (1 of 4)
Export strategy:
• Leverages home country capabilities,
innovations and products in foreign markets.
• Used when pressure for both global integration
and local responsiveness is low.
• Suitable for companies with strong brands (e.g.
Google).
• The key risk is a home country-centred view in
contrast to skilled local rivals.
 Four international strategies (2 of 4)

Multi-domestic strategy:
• Maximises local responsiveness – different product offerings
for different countries.
• A low level of international coordination.
• Organisation is like a collection of relatively independent
units.
• Commonly found in marketing-orientated companies (e.g.
food companies).
• Risks include manufacturing inefficiencies and brand
dilution.
 Four international strategies (3 of 4)

Global strategy:
• Maximises global integration with little or no local
adaptation of products/services.
• Standardised products are deemed to suit all markets and
efficient production is emphasised through economies of
scale.
• Geographically dispersed activities are centrally controlled
from headquarters.
• Common for commodity products (e.g. cement) but also
might include IKEA.
 Four international strategies (4 of 4)

Transnational strategy:
• Complex strategy that maximises local
responsiveness and global coordination.
• Aims to maximise learning and knowledge
exchange between dispersed units.
• Efficient operations but products/services adapted
to local conditions.
• Hard to achieve but General Electric is a possible
example.
 Market selection and entry

Market characteristics

Four elements of the PESTEL framework are

particularly important in comparing countries for
entry:
 Political – political environments vary widely
between countries and can alter rapidly.
 Economic – key comparators are gross domestic
product and disposable income indicating the
potential size of the market.
 Social – factors like population characteristics and
lifestyle and cultural differences.
 Legal – countries vary widely in their legal regime. .
The CAGE framework (1 of 2)

Cultural Administrative and

distance political distance

Geographic Economic/wealth
distance distance
 The CAGE framework (2 of 2)

• Cultural distance – differences in language,

ethnicity, religion and social norms.
• Administrative and political distance –
compatibility of administrative, political or legal
traditions.
• Geographic distance – not just miles but also
aspects such as size, sea-access and the quality of
communications.
• Economic/wealth distance – wealth and income
differences.
International cross-cultural comparison

Note: Based on a survey of managers on standard dimensions (selection presented here).

Source: M. Javidan, P. Dorman, M. de Luque and R. House, ‘In the eye of the beholder: cross-cultural lessons in leadership from Project GLOBE’, Academy of Management
Perspectives (February 2006), pp. 67–90 (Figure 4: USA vs China, p. 82). (GLOBE stands for ‘Global Leadership and Organisational Behaviour Effectiveness’.)
 Competitive characteristics

Country markets can be assessed according

to three criteria:
Market attractiveness to the new
entrant.
The likelihood and extent of defender’s
reaction.
Defenders’ clout – the relative power of
defenders to fight back.
International competitor retaliation

Note: Each bubble represents a country and its size indicates defender’s relative clout
Source: Reprinted by permission of Harvard Business Review. Exhibit adapted from ‘Global gamesmanship’ by I. MacMillan, S. van Putter and R. McGrath, May 2003.
Copyright © 2003 by the Harvard Business School Publishing Corporation. All rights reserved.
 The staged international expansion model

The staged international expansion model proposes a sequential

process whereby companies gradually increase their commitment to
newly entered markets, as they build market knowledge and
capabilities.
This is challenged by two phenomena:
•‘Born-global firms’ – new, small firms that internationalise rapidly
(usually in new technology industries).
•Emerging-countrymultinationals – building unique capabilities in
the home market but exploiting them in international markets very
quickly.
Modes of entry

Export

Licensing or franchising

Joint ventures

Wholly owned subsidiaries

Comparison of entry mode strategies
 Export

Advantages Disadvantages
 No need for  Lose any location
operational facilities advantages in the host
in host country country
 Economies of scale in  Dependence on export
the home country intermediaries
 Internet can facilitate  Exposure to trade barriers
export marketing  Transportation costs.
opportunities.
 Licensing and franchising

Advantages Disadvantages
 Contractual source of  Difficult to identify
income good partner
 Limited economic and  Loss of competitive
financial exposure. advantage
 Limited benefits from
host nation.
 Joint ventures
Disadvantages
Advantages
 Difficult to find good
 Shared investment
partners
risk
 Relationship
 Complementary
management issues
resources
 Loss of competitive
 Maybe a requirement
advantage
for market entry.
 Difficult to integrate
and coordinate.
 Wholly owned subsidiaries
Advantages Disadvantages
 Full control  Substantial investment
 Integration and co- and commitment
ordination possible  Acquisitions may create
 Rapid market entry integration/
through acquisitions coordination issues
 Greenfield
 Greenfield investments
investments are are time consuming and
possible and may be unpredictable.
subsidised.
Subsidiary roles in multinational firms

Source: Reprinted by permission of Harvard Business School Press. From Managing across Borders: The Transnational Solution by C.A. Bartlett and S. Ghoshal. Boston, MA 1989,
pp. 105–11 . Copyright © 1989 by the Harvard Business School Publishing Corporation. All rights reserved.
Internationalisation and performance

Inverted U-curve – complexity may erode

the advantages of internationalisation

Service-sector disadvantages –
internationalisation may only work
well for manufacturing firms

Internationalisation and product diversity

 Summary (1 of 2)
 Internationalisation potential in any particular market
is determined by Yip’s four drivers of
internationalisation: market, cost, government and
competitors’ strategies.
 Besides firm-specific advantages (see Chapter 3), there
are geographic sources of advantage in international
strategy that can be drawn from both national sources
of advantage, as captured in Porter’s Diamond, and
global sourcing through the international value system.
 There are four main types of international strategy,
varying according to extent of coordination and
geographical configuration: export strategy, multi-
domestic strategy, global strategy and
transnational strategy.
Summary (2 of 2)
 Market selection for international entry or expansion
should be based on attractiveness, institutional voids
multi-dimensional measures of distance and
expectations of competitor retaliation.
 Entry mode strategies into new markets include
export, licensing and franchising, joint ventures and
overseas wholly owned subsidiaries.
 Subsidiaries in an international firm can be managed
by portfolio methods just like businesses in a
diversified firm.
 Internationalisationhas an uncertain relationship to
financial performance, with an inverted U-curve
warning against over-internationalisation.
 NEXT

CASE - Amore Pacific – Local to Global

Beauty

CASE - United Cereal – Eurobrand Challenge

 Case:

Amore Pacific

In the factory,
we make cosmetics;
in the store
we sell hope.”
 https://thevou.com/beauty/korean-beauty-
standards/

Case: Amore Pacific

 https://youtu.be/oh7wASOt8SQ
 https://youtu.be/Lh_DdPu-eWQ
 https://youtu.be/G_mq7LVpKZk
 CASE:
Amore Pacific – Local to Global Beauty
 Where and how does AmorePacific make most of its money?
How has it been able to dominate the Korean market
against local firms such as LG HHC and MNCs like L’Oreal?
 Sales – 92.1/4.4/1.1/1.1/0.8/0.6-K/Fr/Ch/Asia/US/HK
 Profits– Mainly from Korea, marginally from Asia,
unprofitable elsewhere
 Product type - .2/68.6/29.2/1.2 – SP/P/M/O
 Channel – 46.3/20.7/18.6/9.2/3.9/1.2 –
D2D/SplSto/DeptSto/DiscSto/DrctSales/Others
 Implications -

58
 CASE:
Amore Pacific – Local to Global Beauty
 Assessthe performance of MNCs – How do they compare
against local competitors? What are the reasons for
local companies outperforming MNCs?

 Home country advantage – Patriotic sentiment

 Large Product portfolio and good market segmentation
 Hi R&D – rooted in local tradition
 Strong distribution across all channels – Habit forming

60

Cont
Cont
d
CASE:
Amore Pacific – Local to Global Beauty
 Assess the performance of MNCs – How do they compare
against local competitors? What are the reasons for local
companies outperforming MNCs?

 Clear Repositioning as Cosmetic Company

 Strong brand management
 Preparation in anticipation of MNC entry + Financial crisis
 Adopt MNC type brand management and apply successfully.

61
 CASE:
Amore Pacific – Local to Global Beauty
 Which of AmorePacific’s three principal international targets
– France/Europe, China and the US – seem the most
promising?
 Should a penetration strategy for the US/Europe be different
from that for China?
 China / France / US
Key attraction – Population/Home of cosmetics/Largest PC
market
Existing position – Small / 2.7% in perfume / very small-high
end mkt
CultureAdministrativeGeographicEconomic (CAGE) analysis
 For product (Cosmetics) 62

 For (Between) countries

 CASE: Amore Pacific – Local to Global Beauty

 CAGE Analysis for Cosmetics

Cultural Administrative Geographic Economic

Government
Differences
Concept of Beauty regulation and Disposable
in climate –
and personal hygiene control through income level
affecting use
tariffs
Importance, Potential
%of income spent
frequency and usage discrimination
Difference in
Home Bias
infrastructure
63

Influence of traditions
 CASE:
Amore Pacific – Local to Global Beauty
 What other recommendations would you make to Suh Kyung-Bae
about Amore Pacific’s internationalization? Would it make sense
to accelerate expansion via inorganic growth?

 Expand in Asian markets

 Detailed planning and steady execution.
 Avoid tackling many markets at same time
 Value learning – Loss making deployment especially France
 Defend home market at all cost – Exploit v/s Explore

64
 CASE:
Amore Pacific – Local to Global Beauty
 KEY TAKEAWAYS

 Strong local competitor can successfully defend home turf

 Importance of CAGE distances in industry like cosmetics
 Importance of some markets – In this case France – for
learning and validation
 Importance of understanding competitor’s home country
contexts and economics – Know your enemy!!

65
 Additional readings / references

 https://hbr.org/1982/09/how-global-companies-win-out
 CASE:
United Cereal – Eurobrand Challenge
 As Lora Brill, would you authorize Jean-Luc Michel’s
request to launch of Healthy Berry Crunch in France?
Why?

 What should Brill propose? Should launch of Healthy

Berry Crunch as the Euro brand be authorized? What
concerns do you have and how will the same be
addressed?

 How might United Cereal implement your

recommendations? What do you think about Eurobrand
68

Team proposal?
 CASE:
United Cereal – Eurobrand Challenge
 The Product –
 https://youtu.be/ExvYZx5-4Co Breakfast Cereals | Consumer Reports

 https://youtu.be/m4reqXABLSU How modern breakfast cereal was invented (14:00+)

69
 CASE: United Cereal – Eurobrand Challenge

 The Company – UNITED CEREAL

 Estb 1910 by Jed Thomas are stable

 By2010 - $9B revenue: BF Cereals  Highest number of Patents

1/3 of revenue and even more of  Brand Management – As profit center

its profits  Strong vertical communication
 Values – Commitment, diligence  Young Brand Managers
and loyalty  Risk averse??
 Promotes managers from within  See from a mile off – Bet the farm??

 UC way – Consumer research,

extensive market testing, Tastes 70
 CASE: United Cereal – Eurobrand Challenge

 The Market
 In 2009 - $21B in revenues WW  Fight for mkt share propels
 US mkt - $12B, 30 companies, innovation
5/80%sales  New brand devp – Expensive &
 Ready to Eat – 90% sales in US & time consuming – Hence brand
extensions
Europe
 US mkt saturated – Hence moving
 10% revenue on Adspend
out to other geographies
 Economies of scale – Ops & Mkt’ng

71
 CASE:
United Cereal – Eurobrand Challenge
 UC’s European Operation

 1952 - Acq English Baked

Goods Company
 Expansion through
acquisition – Distrbn NW
 2009 – 20% of UC WW sales

72
 CASE: United Cereal – Eurobrand Challenge

 European Industry and Competitive Structure

 2010 BF cereal Mkt size - $7B  National subsidiaries

 Overlaid on native tastes  Economy of scale

 PCC – UK / Italy – 8 / 0.5 kg/yr  High Adspend for all

 Channels – Ger / Fr / Italy  2008-09 : Price based competition
 Competition  Decreasing market growth – 1%
 Kellogs / UC / CP – 26 / 20 / 17% mkt
 Emphasis on Efficiency
share

 Kellogs
73
 CASE: United Cereal – Eurobrand Challenge

 UC in Europe

 National Subsidiary – CM US
 Max Subsidiary profit  Lack of resources
 Select and adapt from UC portfolio  Fall in pace of new product
 “Mini UCs” introduction
 Favor product extension
 Freedom within “UC way”?
 Rely on cost reduction for profits
 Inconsistency in product positioning
in different markets
 Higher SG&A expdr – 25% more than
74
 CASE: United Cereal – Eurobrand Challenge

 UC in Europe – Remedial steps by Arne Olsen, VP (Europe)

 Reorganize R&D – ETT

 Europeanization Initiative
 Product market initiative

 Frozen Fruit Juice – Centralized

European operation
 Disaster ! WHY?

 Olsen moved out and replaced by

LORA BRILL

75
 CASE: United Cereal – Eurobrand Challenge

 UC in Europe – EUROBRAND under Lora Brill

 Healthy Berry Crunch Project  Anti oxidant properties

 Increased interest in natural,  Market test in Lyon

healthy foods  Mixed result
 Addition of fruit – ‘halo of health’!
 Modified product (sweetened) – 64%
 2003 Kellogs, 2007 Cereal Partners intention to repurchase based on
already have a product in this focus group
category  Fast growing category – Early mover
 2008 Michel initiated product devp advantage
in Fr + ETT  Adequate time in devp + Test Mkt
76

 Organic Blueberry based cereal cost

 CASE: United Cereal – Eurobrand Challenge

 UC – Integration v/s responsiveness

 Past v/s Present - International
S/Global S/TransN / MultiN S?

77
 CASE: United Cereal – Eurobrand Challenge

 What is “UC Way”? How important is it?

 Market testing

 Top management greenlight

 Centralized management OR De-centralized

78
 CASE: United Cereal – Eurobrand Challenge

 Should Healthy Berry Crunch become a Eurobrand?

 Market characteristics (structure, consumer Behavior) and
trends

 Economy of scale – Where is the max value addition?

Production or marketing!!

 What is the main reason for EuroBrand strategy?

Estb a balance between Global and Local factors

Competitive advantage through lowering cost.

79
 CASE: United Cereal – Eurobrand Challenge
 Should Healthy Berry Crunch become a Eurobrand?

• Advantages • DisAdvantages
• Strategic & Op • Strategic & Op
• Savings in SG&A • No (Euro)customer
• Competitive risk of local • Illusory Economies of scale??
approach • High economic risk
• Organizational • $20m per mkt launch
• Capture benefits of learning • Organizational
• Leverage worldwide capability • Compromise CM accountability
• Reduce subsidiary motivation
• Risk of failure – Too high

80
CASE: United Cereal – Eurobrand Challenge

 How to manage HBC and other Eurobrands? What about

Euroteam future evolution?

Clarify responsibility

Smaller team for better decision making

Adequate experience on the team

Capable (Senior) leadership

81
CASE: United Cereal – Eurobrand Challenge

 How to ensure that Eurobrand team’s decisions will be

implemented by the subsidiaries?
 Adjust team membership composition

 Adjust management systems

Budget losses

Subsidize launches

 Build interdependencies among subsidiaries

82
Learning outcomes
 Assess the internationalisation drivers and potential of
different markets.
 Identify sources of competitive advantage in international
strategy, through both exploitation of local factors and
global sourcing.
 Understand the difference between global integration
and local responsiveness and four main types of
international strategy.
 Rank markets for entry or expansion, taking into account
attractiveness, cultural and other forms of distance and
competitor retaliation threats.
 Assess the relative merits of different market entry
modes, including joint ventures, licensing and and
franchising and wholly owned subsidiaries.